Stock Market Update on Ashok Leyland for 1QFY2012

Stock Market Update on Ashok Leyland for 1QFY2012 with a Buy recommendation and a Target Price of `62 (12 months)

For 1QFY2012, Ashok Leyland (ALL) registered an in-line top-line and operating performance, but high depreciation and interest costs negatively affected the company’s profitability. The increase in average net realisation led to the company’s top-line growth, whereas higher working capital requirements and additions to the gross block in 4QFY2011 led to higher financing and depreciation costs, respectively. We broadly maintain our volume and earnings estimates and continue to maintain our Buy view on the stock.

In-line operating performance; high interest and depreciation costs impact profitability: ALL reported modest 6.3% yoy (down 34.8% qoq) growth in its top line to `2,496cr, driven by an 18% yoy (remained flat qoq) increase in average net realisation. Volume performance, however, was subdued during the quarter, reporting a 9.9% yoy decline (35% qoq), resulting in 500bp of market share loss in the M&HCV segment, which currently stands at 22.2%. Adjusted EBITDA margin came in at 9.4%, registering a decline of 60bp yoy as compared to 10% in 1QFY2011 and in-line with our estimates of 9.5%. Sequentially, however, the operating margin declined by 389bp from 13.3%, largely due to the decline in volumes, which negatively affected the company’s operating leverage. Margins were supported by price increases carried out by the company. ALL reported a 29.7% yoy decline (71.1% qoq) in net profit to `86cr on account of higher-than-expected interest and depreciation expenses.

Outlook and valuation: We expect ALL to report a healthy CAGR of 12–13% in revenue, driven by a 9–10% increase in volumes over FY2011–13E. We estimate the company to report EPS of `5.6 in FY2013E. At `50, ALL is trading at attractive valuations of 8.8x FY2013E EPS. We maintain our Buy rating with a revised target price of `62, valuing the stock at 11x FY2013E earnings.